The seesaw swings both ways with leverage
The main advantage of leverage
The main drawback of using leverage
Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your eyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market. My singular property investment advice: be wary of what you see in the current housing recovery.
All factors and new data suggest a rapidly improving housing arena. But, like the House of Mirrors, everything’s bent totally out of proportion and recognition. And, we’re left with the main issue I’ve preached in two previous articles here this year: all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing. For it is that unemployment rate that should dictate how you invest in these current economic times.
In an article from this week’s Time magazine (“The Housing Mirage,” by Rana Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions, “prices are up, but the market is far from healthy. We’re missing key elements of a true recovery.” She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.” Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years. And this is especially true with institutional investing firms.
She goes on to note “that a relatively small group or rich investors…is driving the real estate market. That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle. That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters. Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.” And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.
Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide. She then makes a point I had predicted back in my article of January 1st here, entitled “Predictions For 2013.” I had written then: “watch the unemployment rate.” I then went on to offer up these pearly bits of property investment advice:
“The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in. So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012. So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.’
And now, five months into 2013, Ms. Foroohar backs me up. She quotes Jonathan Miller, CEO of a New York based real estate appraisal firm, who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit. If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real. Until then, we’re in what I call a precovery.”
She then goes on to bring it all home: “ this precovery has been underwritten by the government at historically unprecedented levels. Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities. And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.” Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back. In truth, it may be the other way around. Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.”
And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate. And cash flows on rental properties would commensurately increase as well.” I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.
My best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy. Especially in this House of Mirrors economy, where rent prices continue to escalate. Continue to make your product more attractive relative to your competition. In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties. With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings.
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If you’re considering long term property investment, now is a great time to start building your portfolio of rental property. And there are a few tried and true rules of thumb you should always follow when first starting out, as you learn the ropes of basic rental property investing. Here are some of the best real estate investment ideas to use when searching for rental property.
If you search for an investment in an area that is already proven – a “hotspot” so to speak – you’ll be paying a premium price for the ability to be in a risk-averse location. Consider searching for properties in fringe areas, those on the outskirts of hot areas. Or in areas that show signs of urban renewal and gentrification. Hint: let area restaurants act as a pointer for you. The greater the influx of higher-end restaurants to a particular town, the greater the likelihood of gentrification. When you by in up-and-coming areas, as opposed to established ones, you’re taking on more risk, but being rewarded for it with a lower purchase price for the property, and a greater chance for market value appreciation over time.
The element of scarcity will yield a greater return on your investment, since competition for other rental property will be much lower in that area. Hence, you may have the ability to obtain a higher rent roll due to such scarcity of local rental units available.
If there is lower unemployment in an area you’re searching in, you’ll have a much easier time renting out your units. Conversely, high unemployment and a dearth of local jobs will yield a greater vacancy rate, no matter how nice your units may be. Be sure to check out the local paper and web sites for jobs in the search area to get a handle on employment demand.
You’ll want to make sure the local area is stable before you invest heavily in any rental property for the long term. You’ll want to see that there is a good mix of owner-occupied and rental properties, with also a good mixture of varied housing available to renters. In addition, you’ll want to check out how steady the local population has been. The most recent census data will help you greatly in determining the best local areas to key in on.
Real estate investors should be searching to invest in areas with a great deal of access to public transportation, as well as easy access to local highways. If the area you’re looking in has a higher degree of unemployment, but excellent public transportation like a commuter railroad and/or buses, then you can consider the overall employment picture for a larger geographic area in your investment analysis.
Even though a property may have been discounted several times already, it may not mean that it is being sold at market value. It may still need to come down even more in price before becoming a good deal. Only by crunching the numbers, and running a Comparative Market Analysis can you gain proper insight into what a property’s current market value may be. When in doubt, ask your local real estate agent for their help in running a Comparative Market Analysis for you.
It is possible that after a long period of searching for rental properties to acquire, you just have not found a good, positive cash flow opportunity. That’s OK – because sometimes it’s simply fine to do nothing, rather than make a mistake. Be patient. Investing is a long term process. And good opportunities will present themselves eventually. As Warren Buffett has said, “when there is nothing to do, do nothing.”
So be sure to utilize all of these rules of thumb to help you in your rental property locating. Remember that any good long term investing will require using these tips in order to find the best real estate investment. Running your numbers and doing these simple analyses for any potential property will point you in the right direction towards the greatest positive cash flow investments.
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